Default Risk Formula

         Many wealthy countries hold debt that is more than their entire yearly GDP! Some very highly rated countries hold a large percentage of debt. In the case of a depression, countries may find it hard to meet the payments. Countries with large amounts of wealth can subsist for a long time. But if a country has large debt payments, low amounts of wealth, and a low GDP—they’re doomed. Throughout history investors ride bubbles and then bail out all at once. Countries like The United States can be a bubble if debt to GDP becomes too large.

        Countries with vast common wealth like Switzerland may be able to hold out longer than countries like the USA where common people have little wealth. Rating agencies like Moody’s and Fitch can give a country like USA a high credit rating, but when a depression sets in—debt will hurt each country differently. We saw in 2008 how Moody’s and Fitch were so inaccurate about their ratings for mortgage products. When a crises sets in, USA treasury bonds will be dramatic, and things will happen FAST! 2008 was a private sector problem. When the USD fails, it will be a government problem.

       I propose that USA treasury bonds currently do not show the correct “risk yield” or “default risk”. I say this because the risk is constant, but the realization or “spark” of a government debt catastrophe will be the real corrector in government debt yields. This shows that bond yield of the USA treasury do not adequately show the default risk. There needs to be a non-emotional and nonhuman indicator of some form of default risk indicator that is unbiased in a way that can show the REAL default risk!

        There needs to be a formula that tells of the likelihood of a government failing… Or measuring when a government will default. Also Known As, not being able to meet its debt payments. We are seeing this government debt crises now in Greece! If only there was some sort of indicator to predict that Greece would have these troubles. Looking back at how reckless the Greek government has spent its money, it is so obvious there were problems. Nobody cares until it hurts! I fully support bankruptcy, but politicians may never say yes to that! (Bankruptcy is superior to debt restructuring because the country has already tarnished its reputation, and debt is not good). Yet a formula to calculate this debt risk must be created. It must involved debt payments, private wealth in a country, and maybe GDP is a small factor of this equation.

Debt will squeeze a country to its knees and eventually kill it… Look at Venezuela.